Exam 14: Taxes on the Financial Statements

Kling Corporation reports a $150,000 cash tax savings from a temporary book-tax difference. This item has the same effect on Kling's current year effective tax rate as a $150,000 cash tax savings that is a permanent book-tax difference.

Morrisson, Inc., earns book net income before tax of $500,000. In computing its book income, Morrisson deducts $50,000 more in warranty expense for book purposes than is allowed for tax purposes. Morrisson records no other temporary or permanent book-tax differences. Assuming that the U.S. tax rate is 35% and no valuation allowance is required, what is Morrisson's current income tax expense reported on its GAAP financial statements?

Which of the following items represents a temporary book-tax difference?

At the beginning of the year, Schrader, Inc., holds a net operating loss carryforward, and its balance sheet shows a related deferred tax asset of $500,000. At the end of the year, the balance in the deferred tax asset account has not changed, but Schrader's auditors want to record a $90,000 valuation allowance against this amount, because of a persistent downturn in Schrader's profitability. Develop the journal entry to record the valuation allowance.

Which of the following taxes are included in the total income tax expense of a corporation as reported on its GAAP financial statements?

Which of the following items represents a temporary book-tax difference?

PaintCo Inc., a domestic corporation, owns 100% of BrushCo Ltd., an Irish corporation. Assume that the U.S. corporate tax rate is 35% and the Irish rate is 15%. PaintCo is permanently reinvesting BrushCo's earnings outside the United States under ASC 740-30 (APB 23). The corporations' book income, permanent and temporary book-tax differences, and current tax expense are reported as follows. ? PaintCo BrushCo Book income before tax \ 600,000 \ 400,000 Permanent differences Meal \& \& entertainment expense 40,000 -0- Municipal bond interest income (10,000) -0- Temporary differences Tax > book depreciation (100,000) -0- Book > tax bad debt expense 20,000 -0- ? Provide the GAAP income tax footnote rate reconciliation for PaintCo using both dollar amounts and percentages.

Book-tax differences can be explained in part by examining the objectives underlying financial accounting and taxable income computations. Evaluate this statement.

Amelia, Inc., is a domestic corporation with the following balance sheet for book and tax purposes at the end of the year. Assume a 34% corporate tax rate and no valuation allowance. Tax Debit/(Credit) Book Debit/(Credit) Assets Cash \ 1,200 \ 1,200 Accounts Receivable 20,000 20,000 Buil dings 1,200,000 1,200,000 Acc. Depreciation (600,000) (320,000) Furniture \& Fixtures 160,000 160,000 Acc. Depreciation (84,000) Total Assets Liabilities Accrued Vacation Pay \- 0- (\ 108,000) Note Payable Total Liabilities Stockholders' Equity Paid in Capital (\ 4,000) (\ 4,000) Retained Eamings Total Liabilities and Stockhol ders' Equity Amelia, Inc.'s, gross deferred tax assets and liabilities at the beginning of Amelia's year are listed below. Beginning of Year Accrued Vacation Pay \ 84,000 Subtotal \ 84,000 Applicable Tax Rate \times34\% Gross Deferred Tax Asset Buil ding - Acc. Depreciation (\ 244,000) Furniture \& fixtures - Acc. Depreciation (12,800) Subtotal (\ 256,800) Applicable tax rate \times34\% Gross deferred tax liability Amelia, Inc.'s, book income before tax is $25,200. Amelia records two permanent book-tax differences. It earned $1,000 in tax-exempt municipal bond interest and $1,840 in nondeductible meals and entertainment expense. Calculate Amelia's current tax expense.

If a valuation allowance is decreased (released) in the current year, the corporation's effective tax rate is lower than if the valuation allowance had not increased.

After applying the balance sheet method to determine the GAAP income tax expense of Cutter Inc., the following account balances are found. Determine the balance sheet presentation of these amounts. Hint: Which of the accounts should you combine for the final balance sheet disclosure? Deferred tax assets, current \ 100,000 Deferred tax liabilities, current 415,000 Deferred tax assets, noncurrent 120,000 Deferred tax liabilities, noncurrent 30,000

The release of a valuation allowance may relate to a tax planning strategy adopted by the taxpayer that will produce taxable income in the future.

Placard, a multinational corporation based in the U.S., has used ASC 740-30 (APB 23) to avoid reporting any U.S. deferred tax expense on $50 million of the earnings of its foreign subsidiaries. All of these subsidiaries operate in countries with lower tax rates than those of the U.S. When the profits eventually are repatriated, how is Placard's effective tax rate affected on its GAAP financial statements?

After applying the balance sheet method to determine the GAAP income tax expense of Poppert Inc., the following account balances are found. Determine the balance sheet presentation of these amounts. Hint: Which of the accounts should you combine for the final balance sheet disclosure? Deferred tax assets, current \ 500,000 Deferred tax assets, noncurrent 145,000 Deferred tax liabilities, current 80,000 Deferred tax liabilities, noncurrent 310,000

Black, Inc., is a domestic corporation with the following balance sheet for book and tax purposes at the end of the year. Assume a 35% corporate tax rate and no valuation allowance. ​ Black, Inc.'s, book income before tax is $6,000. Black records two permanent book-tax differences. It earned $250 in tax-exempt municipal bond interest, and it incurred $500 in nondeductible meals and entertainment expense. Determine the change in Black's deferred tax liabilities for the current year.

In general, the purpose of ASC 740 (SFAS 109) is to compute and disclose the taxes payable by a business entity to state, local, Federal, and foreign governments, for the current year and all future years.

South, Inc., earns book net income before tax of $400,000 in year 1. South acquires a depreciable asset in year 1, and first year tax depreciation exceeds book depreciation by $50,000. At the end of year 1, South's deferred tax liability account balance is $17,500. In year 2, South earns $500,000 book net income before tax, and its book depreciation exceeds tax depreciation by $20,000. South records no other temporary or permanent book-tax differences. Assuming that the U.S. tax rate is 35%, what is South's total provision for income tax expense reported on its GAAP financial statements for year 2?

After applying the balance sheet method to determine the GAAP income tax expense of Cutter Inc., the following account balances are found. Determine the balance sheet presentation of these amounts. Hint: Which of the accounts should you combine for the final balance sheet disclosure? Deferred tax assets, current \ 100,000 Deferred tax liabilities, current 415,000 Deferred tax assets, noncurrent 120,000 Deferred tax liabilities, noncurrent 30,000

Amelia, Inc., is a domestic corporation with the following balance sheet for book and tax purposes at the end of the year. Assume a 34% corporate tax rate and no valuation allowance. Amelia, Inc.'s, book income before tax is $25,200. Amelia records two permanent book-tax differences. It earned $1,000 in tax-exempt municipal bond interest and $1,840 in nondeductible meals and entertainment expense. Determine the change in Amelia's deferred tax liabilities for the current year.

Jogg, Inc., earns book net income before tax of $600,000. Jogg puts into service a depreciable asset this year, and first year tax depreciation exceeds book depreciation by $120,000. Jogg has recorded no other temporary or permanent book-tax differences. Assuming that the U.S. tax rate is 35%, and that this is Jogg's first year of operations, what is Jogg's balance in its deferred tax asset and deferred tax liability accounts at year end?